GO BIG, or go on sale. That was how MSPs were advised to weather an expected onslaught of mergers and acquisitions before the pandemic. Buyers were mostly looking for MSPs bringing in at least $10 million in revenue. Once the pandemic hit in 2020, however, observers expected a mad dash to snatch up all sizes of MSPs on the brink.
The reality looks something like that, just more nuanced.
Overall, M&A activity was at an all-time low in 2020—except in the technology sector, says Linda Rose, M&A adviser with RoseBiz. Deal volume in North America dropped only slightly, partly because tech comprised almost 20% of all activities; MSPs made up the lion’s share of that, she says.
MSPs’ appetite for M&A did dampen briefly. IT Glue’s 2020 Global Benchmark Survey found that in February, 52% of MSPs were considering or open to acquiring or merging with another MSP. That number dropped to 37% by May. The number seeking or open to buyers also dipped 14% in that time period.
By the end of the year, though, the game was back on, says Michael France, managing partner with executive coaching firm Taylor Business Group.
Money to Burn
In 2021, private equity (PE) firms and larger MSPs are on the prowl, flush with cash and motivated by low interest rates.
Rose says PE firms collectively are still sitting on around $1.5 to $2 trillion of “dry powder,” or money they’re looking to invest. Even though bigger sellers have been harder to find, she’s been surprised to see PE buyers looking at firms making as little as $3 million. “Acquisitions are expensive, from due diligence to attorney fees to quality of earnings reports, so the cost benefit is not there when looking into smaller deals,” Rose explains.
France sees the action happening in the $5 million to $10 million range. He says many MSPs are acquiring or merging with smaller firms in order to serve clients whose companies are distributed through the United States.
Some are growing in hopes of being acquired by PE buyers looking for “platform” MSPs, who would then continue acquiring smaller ones. And MSP buyers are much more active now than they were even in 2019, at least partly empowered by an infusion of low-interest COVID relief funds, says France.